Recent Economic Developments

  1. Commencing 2014, a deteriorating external environment and exchange rate adjustments led to an economic slowdown and higher inflation.Gross domestic product (GDP) growth declined from 5.8 percent in 2013 to 4.1 percent in 2014 and 1.2 percent in 2015 (Table 1).Private domestic demand was negatively affected by the 19 percent devaluation of the tengein relation to the U.S. dollar in February 2014, declining industrial exports to China and Russia, the sharp drop in international oil prices starting mid-2014, and the move to a floating exchange rate régime in August 2015. The latter led to a further sharp depreciation of the tenge, fueling inflation which, according to the consumer price index (CPI), rose from 5.8 percent in 2013 to an estimated 6.6 percent in 2015 and a projected 14.2 percent in 2016. While both exports and imports contracted in 2014–15, net exports contributed positively to growth in 2015.Industrial output growth fell from 2.3 percent in 2013 to 0.2 percent in 2014 and−1.6 percent in 2015, affecting related transport and transit activities―both major contributors to the services sector which slowed from 6.9 percent in 2013 to 2.4 percent in 2015―and spreading through the non-oil economy. Meanwhile, credit and payment risks remain high and vulnerable to deterioration as firms’ cash flow comes under increasing strain due to lower profitability, rising interest rates, and weak credit conditions. Althoughagriculture grew by an estimated 1.3 percent in 2014 and 4.1 percent in 2015,its contribution to GDP growth remained small.
  2. The drop in oil prices led to large terms of trade shock and external deficit. Given the economy’s reliance on oil, accounting for about 60–65 percent of total exports, the fall in prices led to a huge deterioration in the balance of payments―from a surplus of US$6.7 billion in 2014 to a deficit of US$10.5billion in 2015. Meanwhile, capital outflows accelerated in response to perceived higher risks related to lower oil prices and the slowing economy, the Government and the private sector both took on foreign debt, and central bank interventions in the market led to foreign exchange losses.
  3. Against this background, the authorities launched two short-term economic support programs in 2014. The first was a two-year (2014–15) US$5.5 billion equivalent program to provide subsidized credit to small and medium enterprises (SMEs) and to settle long-standing non-performing loans (NPLs) in the banking system. The second (Nurly Zholor Bright Path) is a five-year (2015–20) US$15 billion equivalent program intended to (a) modernize physical and social infrastructure; (b) promote non-oil enterprises, including in agribusiness and manufacturing; and (c) improve the business environment, including access to credit.
  4. In2015, with lower oil prices persistingand budget revenues falling, the authorities revised their fiscal policy responseto adjust to the new economic normal.With oil and total revenues having fallen between 2014–15 by an estimated 5.4 and 5.6 percentage points of GDP, respectively,in March 2015, the authorities (a) revised downward the 2015 budget based on an oil price of US$50 per barrel, compared to the US$80 per barrel assumed originally;(b) cut or delayed lower-priority capital expenditures, offsetting funding allocated for the economic support programs; (c) reduced transfers to state-owned enterprises (SOEs); and (d)postponed some public sector salary increases, while protecting social expenditures and vulnerable groups.While these efforts helped adjust on-budget expenditures promptly, the Government spent additionally US$2.7 billion off-budgetto support the ailing national oil company. As a result, the non-oil deficit widened from 8 percent of GDP in 2013 to 10.1 percent in 2014 and to an estimated 12.5 percent in 2015.
  5. While the ongoingfiscal consolidation relies heavily on cutting public investment, the authorities also plan to enhance itseffectiveness and improverevenue collection through various reforms. These include (a) reviewing budget programs to increase their efficiency;(b) adopting new cost norms;(c) enacting a revised law on public-private partnerships (PPPs); and (d) implementing a variety of customs and tax administration and policy measures (including those seeking to close loopholes).The Government also announced alarge privatization program in 2014–15designed to attract private investment, increase revenues, and reduce the public sector’srole in the economy, in particular a number of large SOEsunder the control of the large Samruk-Kazynaholding company (with assets around 40 percent of GDP). Meanwhile, the authoritieslaunched a new targeted social safety net program (Orleu) in 2015 to help protect the most vulnerable. All these policies are also intended to help reduce the country’s reliance on oil, diversify its economy, and strengthen the competitiveness and productivity of other sectors such as agriculture and manufacturing. As such, they are building blocks with the potential to help the economy adjust to lower oil prices and to a different set of relative prices that should encourage non-oil exports.
  6. Inmid-August 2015, the authoritiesfloated the tenge, leading to a further sharp depreciation, and anchored monetary policy to inflation targeting.Whilethe depreciation was needed to align the currency to lower oil prices and new economic conditions, it also led to a spike in inflation, whichis expected to subside by end-2016. Vulnerable households are expected to be affectedmostly by higher inflation, as the prices of clothing,household appliances, healthcare, and medicine increased the most. The depreciation and the economy’s high level ofdollarization exacerbates financial institutions’ balance sheet risk (currency risks) and curtails private sector credit growth. It also renews concerns about the stability of the banking system, which is still grappling with the aftermath of the 2008–09 financial crisis.Rating agencies have downgraded several large banks to junk status, based on their sizableforeign exchange exposures and/or limited capital buffers. The state exhibits an overbearing presence in the banking sector, deterring private sector participation, wider foreign involvement, and greater competition. To some extent, this excessive state intervention in the banking sector is a result of the impact of the global financial crisis, which resulted in the nationalization or recapitalization of failing banks by the Government.

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